BENEFITS OF BANK RECONCILIATION

Bank reconciliations are an important accounting procedure, performed by companies of all sizes, to match the cash balance of the bank with the balance found on the company's financial records. Reconciliations can detect and prevent intentional fraud, along with errors by bank tellers, accountants, employees, and management. Although bank reconciliation is typically a month-end procedure, companies with smaller cash resources might perform it daily.

Detects fraud
Because bank reconciliations match a company's disbursed checks with the cleared checks on the company's bank statement, a careful review based on appropriate controls and procedures helps to reveal fraudulent activities. These could include payments for illegitimate business purposes, payments to unauthorized employees or unauthorized vendors, and amended check amounts and details.

Prevents overdraft
The lag time between cash outflows to vendors and employees - and payments coming in from clients and customers - can vary considerably. This is especially important when a company is operating on very low cash reserves. Regular bank reconciliations can help management postpone payments that would result in company overdrafts, bounced checks, and insufficient-fund fees and interest.

Identifies bank errors

Bank clerks make bank errors regularly- they might transpose numbers and record the wrong check amount, record the correct amount to the wrong bank account, omit an amount from a company's bank statement, or record a duplicate transaction. Reconciling the bank account gives the company time to notify the bank of its error, allowing the bank to research the discrepancy and correct the account.

Check on the entries
In the process of preparing a bank reconciliation statement, an accountant will be able to point out all entries or amounts, recorded incorrectly in either of the books. Thus, it is quite useful to prepare a bank reconciliation statement, which would help in eliminating any entries recorded erroneously.

Improves collection actions
Bank reconciliations allow companies to better manage their accounts receivable. When a customer's payment clears the bank, the receivable is no longer outstanding and therefore requires no further action. But if the client's check doesn't clear, that alerts management to be more aggressive in its collection efforts.